Stocks to Tap For Digital Payment Revolution

Non-cash transactions are projected to reach a whopping US$1.1 trillion by 2023.

Vikram Barhat 31 March, 2021 | 12:19AM
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The central bank of Norway announced last week that the country was the most cashless society in the world. A recent survey conducted by Norges Bank found cash accounted only for 4% of payments, the majority were made by digital wallets or contactless cards.

It’s not just Norway. A recent Capgemini report shows global volume of non-cash transactions hit US$708.5 billion, growing 14.1% during 2018–2019. As new payments methods – including mobile payments, digital wallets, eMoney transactions and other forms of digital payments -- take hold, non-cash transactions are projected to reach a whopping US$1.1 trillion by 2023.

The faster adoption of cryptocurrencies, particularly of Bitcoin, is set to further fuel the digital cash trend as legacy financial institutions and payment processors move to bring crypto into their operations. The following companies are at the leading edge of digital cash revolution and are well positioned to benefit as newer technologies and trends create tailwind for cashless transactions. Although these names are currently overvalued, investors may want to keep them on their screen for any buying opportunities that may emerge in the foreseeable future. 

 Visa Inc Class A

 

Ticker

V

 

Current yield:

0.60%

 

Forward P/E:

34.60

 

Price

US$201.54

 

Fair value:

US$166

 

Value

21% Premium

 

Moat

Wide

 

Moat Trend

Stable

 

Star rating

**

Data as of Sept 10, 2020

Payments giant Visa (V) operates in over 200 countries and processed US$9 trillion worth of transactions in over 160 currencies in 2020.

“Visa is a somewhat unique company in that it is a longtime established market leader that still enjoys strong growth prospects,” says a Morningstar equity report, stressing that despite the ongoing evolution in the payments industry, the wide-moat Visa’s position in the global electronic payment infrastructure remains unassailable.

The world’s largest payment processor is fully tapped into global rotation towards electronic payments which has boosted Visa’s growth historically and will continue to do so for the foreseeable future. Digital payments outstripped cash payments globally a couple of years ago and the gap continues to widen with new technologies revolutionizing the payment space.  “Visa’s position as the leading network makes it something of a tollbooth business, and the company is relatively agnostic to the smaller shifts within electronic payments, since it earns fees regardless of whether payment is credit, debit, or mobile,” says Morningstar equity analyst Brett Horn, who recently increased the stock’s fair value from US$186 to US$194.

The credit card issuer recently indicated it may add cryptocurrencies to the company’s payments network. Visa is also reportedly tying up with cryptocurrency startups and exchanges to offer credit and debit cards that allow bitcoin accessibility to its consumers. 

Mastercard Inc A

 

Ticker

MA

 

Current yield:

0.47%

 

Forward P/E:

38.31

 

Price

US$332.88

 

Fair value:

US$272

 

Value

22% Premium

 

Moat

Wide

 

Moat Trend

Stable

 

Star rating

**

Data as of Sept 10, 2020


Mastercard (MA) is the world’s second-largest payment processor, operating in more than 200 countries. Last year, the company processed US$4.8 trillion worth of transactions in over 150 currencies. Like its rival Visa, Mastercard dominates the global payments landscape and is one of the biggest beneficiaries of the shift towards cashless payments, a trend that has ample room to run.

"Despite ongoing evolution in the payments space, a wide moat surrounds the business,” says a Morningstar equity report, noting that Mastercard’s position within the current global electronic payment infrastructure remains “essentially unassailable.”

While competition from regional networks may intensify as they build out additional capacity for cross-border transactions, “Visa and Mastercard’s global networks remain unparalleled, and this will remain the case for many years to come,” assures Horn, who recently upped Mastercard’s fair value from US$312 to US$320 per share.

As well, Mastercard recently announced its decision to take the crypto leap in response to growing popularity of digital currencies. The processor will support select cryptocurrencies directly on its network later this year. It may be noted that Mastercard's customers are already using its cards "to buy crypto assets, especially during bitcoin's recent surge in value," the company claims

PayPal Holdings Inc

Ticker

PYPL

Current yield:

-

Forward P/E:

42.55

Price

US$190.09

Fair value:

US$110

Value

73% Premium

Moat

Narrow

Moat Trend

Stable

Star rating

*

Data as of Sept 10, 2020

Electronic payments processor PayPal (PYPL) had 377 million active accounts at the end of 2020, including 29 million merchant accounts. Its unique model centres around a two-sided platform, which helps PayPal create relationships with both merchants and consumers. The firm also owns Xoom, an international money transfer business, and Venmo, a person-to-person payment platform.

“PayPal’s development of a network of merchant and consumers early in the evolution of online commerce has allowed the company to build and maintain an enviable competitive position,” says a Morningstar equity report, pointing out that the company’s growth has “remained turbocharged by the ongoing shift toward electronic payments and the rise of e-commerce, and the coronavirus further accelerated the shift toward e-commerce.”

While competition on both the merchant and consumer side could erode its position over time, “the company can hold its own,” asserts Horn, who recently raised the stock’s fair value from US$124 to US$139, prompted by an increase in long-term profitability assumptions and an increase in the value of the company's investments.

The online payments company became one of the largest U..S companies to foray into the market for digital currencies when it announced it would allow millions of U.S. users to trade cryptocurrencies. This is in addition to PayPal recently agreeing to buy Tel Aviv-based Curv, a company that provides digital asset-security technology, as the former intensifies its push into cryptocurrencies and digital assets.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Mastercard Inc A319.26 USD0.32Rating
PayPal Holdings Inc74.40 USD4.20Rating
Visa Inc Class A200.54 USD0.68Rating

About Author

Vikram Barhat

Vikram Barhat  Vikram Barhat is a Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry. He also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.

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